UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ____ to ____
Commission file no:
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
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Telephone Number: ( |
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
At July 28, 2019,
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with certain reduced disclosures as permitted by those instructions.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
John Deere Capital Corporation and Subsidiaries
Statement of Consolidated Income
(Unaudited)
(in millions)
Three Months Ended | Nine Months Ended |
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July 28 | July 29 | July 28 | July 29 |
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| 2019 |
| 2018 |
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| 2018 |
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Revenues | |||||||||||||
Finance income earned on retail notes | $ | | $ | | $ | | $ | | |||||
Revolving charge account income |
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Finance income earned on wholesale receivables |
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Lease revenues |
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Other income |
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Total revenues |
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Expenses | |||||||||||||
Interest expense |
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Operating expenses: | |||||||||||||
Administrative and operating expenses |
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Fees paid to John Deere |
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Provision for credit losses |
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Depreciation of equipment on operating leases |
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Total operating expenses |
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Total expenses |
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Income of consolidated group before income taxes |
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Provision (credit) for income taxes |
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Income of consolidated group |
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Equity in income of unconsolidated affiliate |
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Net income |
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Less: Net income (loss) attributable to noncontrolling interests | | ( | | ( | |||||||||
Net income attributable to the Company | $ | | $ | | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
2
John Deere Capital Corporation and Subsidiaries
Statement of Consolidated Comprehensive Income
(Unaudited)
(in millions)
Three Months Ended | Nine Months Ended |
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July 28 | July 29 | July 28 | July 29 |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income (loss), net of income taxes | |||||||||||||
Cumulative translation adjustment |
| ( | ( | ( | ( | ||||||||
Unrealized gain (loss) on derivatives |
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Other comprehensive income (loss), net of income taxes |
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Comprehensive income of consolidated group |
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Less: Comprehensive income (loss) attributable to noncontrolling interests | | ( | | ( | |||||||||
Comprehensive income attributable to the Company | $ | | $ | | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
3
John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
(in millions)
July 28 | October 28 | July 29 |
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2019 | 2018 | 2018 |
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Assets |
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Cash and cash equivalents | $ | | $ | | $ | | ||||
Marketable securities | | |||||||||
Receivables: | ||||||||||
Retail notes |
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Retail notes securitized |
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Revolving charge accounts |
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Wholesale receivables |
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Financing leases |
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Total receivables |
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Allowance for credit losses |
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Total receivables – net |
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Other receivables |
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Receivables from John Deere |
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Equipment on operating leases – net |
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Notes receivable from John Deere | | | | |||||||
Investment in unconsolidated affiliate |
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Deferred income taxes |
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Other assets |
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Total Assets | $ | | $ | | $ | | ||||
Liabilities and Stockholder’s Equity | ||||||||||
Short-term borrowings: | ||||||||||
Commercial paper and other notes payable | $ | | $ | | $ | | ||||
Securitization borrowings |
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John Deere |
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Current maturities of long-term borrowings |
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Total short-term borrowings |
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Other payables to John Deere |
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Accounts payable and accrued expenses |
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Deposits withheld from dealers and merchants |
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Deferred income taxes |
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Long-term borrowings |
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Total liabilities |
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Commitments and contingencies (Note 7) | ||||||||||
Stockholder’s equity: | ||||||||||
Common stock, without par value (issued and outstanding – |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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Total Company stockholder’s equity |
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Noncontrolling interests |
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Total stockholder’s equity |
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Total Liabilities and Stockholder’s Equity | $ | | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
4
John Deere Capital Corporation and Subsidiaries
Statement of Consolidated Cash Flows
For the Nine Months Ended July 28, 2019 and July 29, 2018
(Unaudited)
(in millions)
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| 2019 |
| 2018 |
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Cash Flows from Operating Activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash | |||||||
provided by operating activities: | |||||||
Provision for credit losses |
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Provision for depreciation and amortization |
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Credit for deferred income taxes |
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Undistributed earnings of unconsolidated affiliate |
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Change in accounts payable and accrued expenses |
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Change in accrued income taxes payable/receivable |
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Other |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: | |||||||
Cost of receivables acquired (excluding wholesale) |
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Collections of receivables (excluding wholesale) |
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Increase in wholesale receivables – net |
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Cost of equipment on operating leases acquired |
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Proceeds from sales of equipment on operating leases |
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Cost of notes receivable with John Deere | ( | ( | |||||
Collections of notes receivable with John Deere | | | |||||
Purchases of marketable securities | ( | ||||||
Proceeds from maturities and sales of marketable securities | | ||||||
Other |
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Net cash used for investing activities |
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Cash Flows from Financing Activities: | |||||||
Increase (decrease) in commercial paper and other notes payable – net |
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Increase in securitization borrowings – net |
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Increase in payable to John Deere – net |
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Proceeds from issuance of long-term borrowings |
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Payments of long-term borrowings |
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Dividends paid |
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Capital investment from John Deere | | | |||||
Debt issuance costs |
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Net cash provided by financing activities |
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Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
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Net increase (decrease) in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
5
John Deere Capital Corporation and Subsidiaries
Statement of Changes in Consolidated Stockholder’s Equity
For the Three and Nine Months Ended July 28, 2019 and July 29, 2018
(Unaudited)
(in millions)
Company Stockholder |
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Accumulated | ||||||||||||||||
Total | Other | Non- | ||||||||||||||
Stockholder’s | Common | Retained | Comprehensive | Controlling | ||||||||||||
Equity | Stock | Earnings | Income (Loss) | Interests |
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Three Months Ended July 29, 2018 | ||||||||||||||||
Balance April 29, 2018 | $ | |
| $ | |
| $ | |
| $ | ( |
| $ | | ||
Net income (loss) | | | ( | |||||||||||||
Other comprehensive loss | ( | ( | ||||||||||||||
Capital investment | | | ||||||||||||||
Balance July 29, 2018 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Nine Months Ended July 29, 2018 | ||||||||||||||||
Balance October 29, 2017 |
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Net income (loss) |
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Other comprehensive income |
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Dividends declared |
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Capital investment |
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Balance July 29, 2018 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Three Months Ended July 28, 2019 | ||||||||||||||||
Balance April 28, 2019 | $ | |
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| $ | |
| $ | ( |
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Net income | | | | |||||||||||||
Other comprehensive loss | ( | ( | ||||||||||||||
Dividends declared | ( | ( | ||||||||||||||
Capital investment | | | ||||||||||||||
Balance July 28, 2019 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Nine Months Ended July 28, 2019 | ||||||||||||||||
Balance October 28, 2018 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income |
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Other comprehensive loss |
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Dividends declared |
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Capital investment | | | ||||||||||||||
Balance July 28, 2019 | $ | | $ | | $ | | $ | ( | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
6
John Deere Capital Corporation and Subsidiaries
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
(1) Organization and Consolidation
The interim consolidated financial statements of John Deere Capital Corporation (Capital Corporation) and its subsidiaries (collectively called the Company) have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations, and cash flows at the dates and for the periods presented. It is suggested that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The third quarter ends for fiscal year 2019 and 2018 were July 28, 2019 and July 29, 2018, respectively. Both periods contained
The Company provides and administers financing for retail purchases of new equipment manufactured by Deere & Company’s agriculture and turf and construction and forestry operations and used equipment taken in trade for this equipment. The Company generally purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). John Deere generally acquires these retail notes through John Deere retail dealers. The Company also purchases and finances a limited amount of non-Deere retail notes. The Company also finances and services revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). The Company also provides wholesale financing for inventories of John Deere agriculture and turf and construction and forestry equipment for dealers of those products (wholesale receivables). In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also offers credit enhanced international export financing to select customers and dealers, which generally involves John Deere products. Retail notes, revolving charge accounts, wholesale receivables, and financing leases are collectively called “Receivables.” Receivables and equipment on operating leases are collectively called “Receivables and Leases.”
(2) New Accounting Standards
New Accounting Standards Adopted
In the first quarter of 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
7
In the first quarter of 2019, the Company adopted ASU
In the first quarter of 2019, the Company adopted ASU
In the first quarter of 2019, the Company
The Company also adopted the following standards in the first quarter of 2019, none of which had a material effect on the Company’s consolidated financial statements:
Accounting Standards Updates
Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows | |
Intra-Entity Transfers of Assets Other Than Inventory, which amends ASC 740, Income Taxes | |
Clarifying the Definition of a Business, which amends ASC 805, Business Combinations | |
Scope of Modification Accounting, which amends ASC 718, Compensation - Stock Compensation | |
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement | |
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which amends ASC 815, Derivatives and Hedging |
New Accounting Standards to be Adopted
In February 2016, the FASB issued ASU
8
lessors to exclude sales and related taxes from consideration in the contract, requires lessors to exclude from revenue and expense lessor costs paid directly to a third party by lessees, and clarifies lessors’ accounting for variable payments related to both lease and nonlease components. In March 2019, the FASB issued ASU No. 2019-01, Leases: Codification Improvements. The ASU allows certain lessors, including captive finance companies, to use their cost as the fair value of the to-be-leased asset. The ASU also clarifies the presentation of lease payments in the statement of cash flows and the required transition disclosures. The effective date will be the first quarter of fiscal year 2020. The Company is evaluating the potential effects on the consolidated financial statements and will adopt the ASU using the modified-retrospective approach that will not require earlier periods to be restated.
In June 2016, the FASB issued ASU
In August 2018, the FASB issued ASU
In April 2019, the FASB issued ASU
9
(3) Other Comprehensive Income Items
The after-tax changes in accumulated other comprehensive income (loss) were as follows (in millions of dollars):
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| Unrealized |
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Cumulative | Gain (Loss) | Other |
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Translation | on | Comprehensive |
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Adjustment | Derivatives | Income (Loss) |
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Balance October 29, 2017 | $ | ( | $ | | $ | ( | ||||
Other comprehensive income (loss) items before reclassification |
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Amounts reclassified from accumulated other comprehensive income |
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Net current period other comprehensive income (loss) |
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Balance July 29, 2018 | $ | ( | $ | | $ | ( | ||||
Balance October 28, 2018 | $ | ( | $ | | $ | ( | ||||
Other comprehensive income (loss) items before reclassification |
| ( |
| ( |
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Amounts reclassified from accumulated other comprehensive income |
| ( |
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Net current period other comprehensive income (loss) |
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| ( |
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Balance July 28, 2019 | $ | ( | $ | ( | $ | ( |
10
Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, (in millions of dollars):
Before | Tax | After |
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Tax | (Expense) | Tax |
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Three Months Ended July 28, 2019 | Amount | Credit | Amount |
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Cumulative translation adjustment |
| $ | ( |
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| $ | ( | |||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
| ( | $ | |
| ( | ||||
Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
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Net unrealized gain (loss) on derivatives |
| ( |
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Total other comprehensive income (loss) | $ | ( | $ | | $ | ( | ||||
Nine Months Ended July 28, 2019 | ||||||||||
Cumulative translation adjustment | $ | ( | $ | ( | ||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
| ( | $ | |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
| ( | | ( | ||||||
Net unrealized gain (loss) on derivatives |
| ( |
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Total other comprehensive income (loss) | $ | ( | $ | | $ | ( | ||||
Three Months Ended July 29, 2018 | ||||||||||
Cumulative translation adjustment | $ | ( | $ | ( | ||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
| ( |
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Net unrealized gain (loss) on derivatives |
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Total other comprehensive income (loss) | $ | ( | $ | | $ | ( | ||||
Nine Months Ended July 29, 2018 | ||||||||||
Cumulative translation adjustment | $ | ( | $ | ( | ||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
| ( |
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Net unrealized gain (loss) on derivatives |
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Total other comprehensive income (loss) | $ | | $ | ( | $ | |
(4) Receivables
Past due balances of Receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts
The Company monitors the credit quality of Receivables based on delinquency status. Non-performing Receivables represent loans for which the Company has ceased accruing finance income. Generally, when retail notes, revolving charge accounts, and finance lease accounts are
11
During the first quarter of 2019, the Company amended the timing in which finance income and lease revenue is generally suspended on retail notes, revolving charge accounts, and finance lease accounts from
Receivable balances are written off to the allowance for credit losses when, in the judgement of management, they are considered uncollectible. Generally, when retail notes and finance lease accounts are
An age analysis of past due Receivables that are still accruing interest and non-performing Receivables was as follows (in millions of dollars):
July 28, 2019 |
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30-59 Days | 60-89 Days | or Greater | Total |
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Past Due | Past Due | Past Due | Past Due |
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Retail notes: | |||||||||||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
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Revolving charge accounts: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Wholesale receivables: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Financing leases: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Total Receivables | $ | | $ | | $ | | $ | | |||||
| Total |
| Total Non- |
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| Total |
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Past Due | Performing | Current | Receivables |
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Retail notes: | |||||||||||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
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Revolving charge accounts: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Wholesale receivables: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Financing leases: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Total Receivables | $ | | $ | | $ | | $ | | |||||
12
October 28, 2018 |
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| 90 Days |
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30-59 Days | 60-89 Days | or Greater | Total |
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Past Due | Past Due | Past Due | Past Due |
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Retail notes: | |||||||||||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
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Revolving charge accounts: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Wholesale receivables: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Financing leases: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Total Receivables | $ | | $ | | $ | | $ | | |||||
Total | Total Non- | Total |
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Past Due | Performing | Current | Receivables |
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Retail notes: | |||||||||||||
Agriculture and turf |
| $ | |
| $ | |
| $ | |
| $ | | |
Construction and forestry |
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Revolving charge accounts: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Wholesale receivables: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Financing leases: | |||||||||||||
Agriculture and turf |
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Construction and forestry |
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Total Receivables |
| $ | | $ | | $ | | $ | | ||||
13
July 29, 2018 |
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| 90 Days |
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30-59 Days | 60-89 Days | or Greater | Total |
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Past Due | Past Due | Past Due | Past Due |
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Retail notes: | |||||||||||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
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Revolving charge accounts: | |||||||||||||
Agriculture and turf |
| | | |
| | |||||||
Construction and forestry |
| | | |
| | |||||||
Wholesale receivables: | |||||||||||||
Agriculture and turf |
| | | |
| | |||||||
Construction and forestry |
| | |
| | ||||||||
Financing leases: | |||||||||||||
Agriculture and turf |
| | | |
| | |||||||
Construction and forestry |
| | | |
| | |||||||
Total Receivables | $ | | $ | | $ | | $ | | |||||
| Total |
| Total Non- |
|
| Total |
| ||||||
Past Due | Performing | Current | Receivables |
| |||||||||
Retail notes: | |||||||||||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
| |
| | |
| | ||||||
Revolving charge accounts: | |||||||||||||
Agriculture and turf |
| |
| | |
| | ||||||
Construction and forestry |
| | |
| | ||||||||
Wholesale receivables: | |||||||||||||
Agriculture and turf |
| |
| | |
| | ||||||
Construction and forestry |
| | |
| | ||||||||
Financing leases: | |||||||||||||
Agriculture and turf |
| |
| | |
| | ||||||
Construction and forestry |
| |
| | |
| | ||||||
Total Receivables | $ | | $ | | $ | | $ | |
14
Allowances for credit losses on Receivables are maintained in amounts considered to be appropriate in relation to the Receivables outstanding based on historical loss experience by product category, portfolio duration, delinquency trends, economic conditions in the Company’s major markets and geographies, and credit risk quality. An analysis of the allowance for credit losses and investment in Receivables was as follows (in millions of dollars):
Three Months Ended |
| |||||||||||||||
July 28, 2019 |
| |||||||||||||||
Revolving |
| |||||||||||||||
Retail | Charge | Wholesale | Financing | Total |
| |||||||||||
Notes | Accounts | Receivables | Leases | Receivables |
| |||||||||||
Allowance: | ||||||||||||||||
Beginning of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Provision (credit) for credit losses |
| | | ( | | | ||||||||||
Write-offs |
| ( | ( | ( | ( | ( | ||||||||||
Recoveries |
| | | | | | ||||||||||
End of period balance | $ | | $ | | $ | | $ | | $ | |
Nine Months Ended |
| |||||||||||||||
July 28, 2019 |
| |||||||||||||||
Revolving |
| |||||||||||||||
Retail | Charge | Wholesale | Financing | Total |
| |||||||||||
Notes | Accounts | Receivables | Leases | Receivables |
| |||||||||||
Allowance: | ||||||||||||||||
Beginning of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Provision (credit) for credit losses |
| | | ( | | | ||||||||||
Write-offs |
| ( | ( | ( | ( | ( | ||||||||||
Recoveries |
| | | | | | ||||||||||
Translation adjustments |
| ( | | |||||||||||||
End of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Balance individually evaluated * | $ | | $ | | $ | | $ | | ||||||||
Receivables: | ||||||||||||||||
End of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Balance individually evaluated * | $ | | $ | | $ | | $ | | $ | |
* Remainder is collectively evaluated.
15
Three Months Ended |
| |||||||||||||||
July 29, 2018 |
| |||||||||||||||
Revolving |
| |||||||||||||||
Retail | Charge | Wholesale | Financing | Total |
| |||||||||||
Notes | Accounts | Receivables | Leases | Receivables |
| |||||||||||
Allowance: | ||||||||||||||||
Beginning of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Provision for credit losses |
| | | | |
| | |||||||||
Write-offs |
| ( | ( | ( | ( |
| ( | |||||||||
Recoveries |
| | | | |
| | |||||||||
Translation adjustments |
| ( | ( |
| ( | |||||||||||
End of period balance | $ | | $ | | $ | | $ | | $ | |
Nine Months Ended |
| |||||||||||||||
July 29, 2018 |
| |||||||||||||||
Revolving |
| |||||||||||||||
Retail | Charge | Wholesale | Financing | Total |
| |||||||||||
Notes | Accounts | Receivables | Leases | Receivables |
| |||||||||||
Allowance: | ||||||||||||||||
Beginning of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Provision for credit losses |
| | | | |
| | |||||||||
Write-offs |
| ( | ( | ( | ( |
| ( | |||||||||
Recoveries |
| | | | |
| | |||||||||
Translation adjustments |
| ( | |
| ( | |||||||||||
End of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Balance individually evaluated * | $ | | $ | | $ | | $ | | ||||||||
Receivables: | ||||||||||||||||
End of period balance | $ | | $ | | $ | | $ | | $ | | ||||||
Balance individually evaluated * | $ | | $ | | $ | | $ | | $ | |
* Remainder is collectively evaluated.
Receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.
16
An analysis of impaired Receivables was as follows (in millions of dollars):
|
| Unpaid |
|
| Average |
| |||||||
Recorded | Principal | Specific | Recorded |
| |||||||||
Investment | Balance | Allowance | Investment |
| |||||||||
July 28, 2019 * | |||||||||||||
Receivables with specific allowance: | |||||||||||||
Retail notes | $ | | $ | | $ | | $ | | |||||
Wholesale receivables | | | | | |||||||||
Financing leases | | | | | |||||||||
Total with specific allowance |
| |
| |
| |
| | |||||
Receivables without specific allowance: | |||||||||||||
Retail notes |
| | | | |||||||||
Wholesale receivables | | | | ||||||||||
Total without specific allowance |
| |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | |||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
| | | | | ||||||||
Total | $ | | $ | | $ | | $ | | |||||
October 28, 2018 * | |||||||||||||
Receivables with specific allowance: | |||||||||||||
Retail notes | $ | | $ | | $ | | $ | | |||||
Wholesale receivables | | | | | |||||||||
Total with specific allowance |
| |
| |
| |
| | |||||
Receivables without specific allowance: | |||||||||||||
Retail notes |
| |
| |
| | |||||||
Wholesale receivables | | | | ||||||||||
Total without specific allowance |
| |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | |||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
| |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | |||||
July 29, 2018 * | |||||||||||||
Receivables with specific allowance: | |||||||||||||
Retail notes | $ | | $ | | $ | | $ | | |||||
Wholesale receivables | | | | | |||||||||
Financing leases | | | | | |||||||||
Total with specific allowance |
| |
| |
| |
| | |||||
Receivables without specific allowance: | |||||||||||||
Retail notes |
| |
| |
| | |||||||
Wholesale receivables | | | | ||||||||||
Total without specific allowance |
| |
| |
|
| | ||||||
Total | $ | | $ | | $ | | $ | | |||||
Agriculture and turf | $ | | $ | | $ | | $ | | |||||
Construction and forestry |
| |
| | |
| | ||||||
Total | $ | | $ | | $ | | $ | |
* Finance income recognized was not material.
17
A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2019, the Company identified
(5) Securitization of Receivables
The Company, as a part of its overall funding strategy, periodically transfers certain Receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.
In these securitizations, the retail notes are transferred to certain SPEs or to non-VIE banking operations, which in turn issue debt to investors. The debt securities issued to the third party investors result in secured borrowings, which are recorded as “Securitization borrowings” on the balance sheet. The securitized retail notes are recorded as “Retail notes securitized” on the balance sheet. The total restricted assets on the consolidated balance sheet related to these securitizations include the retail notes securitized less an allowance for credit losses, and other assets primarily representing restricted cash. Restricted cash results from contractual requirements in securitized borrowing arrangements and serves as a credit enhancement. The restricted cash is used to satisfy payment deficiencies, if any, in the required payments on secured borrowings. The balance of restricted cash is contractually stipulated and is either a fixed amount as determined by the initial balance of the retail notes securitized or a fixed percentage of the outstanding balance of the retail notes securitized. The restriction is removed either after all secured borrowing payments are made or proportionally as these receivables are collected and borrowing obligations reduced. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.
In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the Receivables held by the SPEs and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses, and other assets) of the consolidated SPEs totaled $
In certain securitizations, the Company transfers retail notes to non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to the securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $
18
borrowings and accrued interest) were $
In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $
The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets was as follows (in millions of dollars):
July 28 | ||||||||||
2019 | ||||||||||
Carrying value of liabilities | $ | | ||||||||
Maximum exposure to loss |
| |
The total assets of unconsolidated VIEs related to securitizations were approximately $
The components of consolidated restricted assets related to secured borrowings in securitization transactions were as follows (in millions of dollars):
July 28 | October 28 | July 29 |
| |||||||
2019 | 2018 | 2018 |
| |||||||
Retail notes securitized | $ | | $ | | $ | | ||||
Allowance for credit losses |
| ( |
| ( |
| ( | ||||
Other assets |
| |
| |
| | ||||
Total restricted securitized assets | $ | | $ | | $ | |
The components of consolidated secured borrowings and other liabilities related to securitizations were as follows (in millions of dollars):
July 28 | October 28 | July 29 |
| |||||||
2019 | 2018 | 2018 |
| |||||||
Securitization borrowings | $ | | $ | | $ | | ||||
Accrued interest on borrowings |
| |
| |
| | ||||
Total liabilities related to restricted securitized assets | $ | | $ | | $ | |
The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company's short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At July 28, 2019, the maximum remaining term of all restricted securitized retail notes was approximately
19
(6) Notes Receivable from John Deere
The Company makes loans to affiliated companies. The Company receives interest from John Deere at competitive market interest rates. The lending agreements mature over the next
The Company had notes receivable from John Deere with the following affiliated companies as follows (in millions of dollars):
July 28 | October 28 | July 29 | ||||||||
2019 | 2018 | 2018 | ||||||||
Limited Liability Company John Deere Financial | $ | | $ | | $ | | ||||
Banco John Deere S.A. | |
| |
| | |||||
Total Notes Receivable from John Deere | $ | | $ | | $ | |
(7) Commitments and Contingencies
At July 28, 2019, John Deere Financial Inc., the John Deere finance subsidiary in Canada, had $
Capital Corporation has a variable interest in John Deere Canada Funding Inc. (JDCFI), a wholly-owned subsidiary of John Deere Financial Inc., which was created as a VIE to issue debt in public markets to fund the operations of affiliated companies in Canada. Capital Corporation has a variable interest in JDCFI because it provides guarantees for all debt issued by JDCFI, however it does not consolidate JDCFI because it does not have the power to direct the activities that most significantly impact JDCFI’s economic performance. Capital Corporation has
The Company has commitments to extend credit to customers and John Deere dealers through lines of credit and other pre-approved credit arrangements. The Company applies the same credit policies and approval process for these commitments to extend credit as it does for its Receivables. Collateral is not required for these commitments, but if credit is extended, collateral may be required upon funding. The amount of unused commitments to extend credit to John Deere dealers was $
At July 28, 2019, the Company had restricted other assets associated with borrowings related to securitizations (see Note 5). Excluding the securitization programs, the remaining balance of restricted other assets was not material as of July 28, 2019.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to retail credit matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.
20
(8) Income Taxes
In 2019, the Company is subject to additional provisions of the U.S. tax reform legislation enacted in December 2017 (tax reform). The Company’s 2019 U.S. statutory corporate income tax rate is
In 2019 and 2018, the Company recorded discrete tax adjustments related to the remeasurement of the Company’s net deferred tax liabilities to the new corporate income tax rate and for the deemed earnings repatriation tax (repatriation tax). Those adjustments for the third quarter and first nine months of 2019 and 2018 were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | |||||||||||||
July 28 | July 29 | July 28 | July 29 | |||||||||||
2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
Net deferred tax liability remeasurement | $ | ( | $ | | $ | ( | ||||||||
Deemed earnings repatriation tax | $ | ( |
|
| ( |
| | |||||||
Total discrete tax (benefit) expense | $ | ( | $ | ( | $ | ( | $ | ( |
The full year 2018 discrete tax benefit for the remeasurement of the net deferred tax liabilities was $
The taxable income of the Company is included in the consolidated U.S. income tax return of Deere & Company. Under a tax sharing agreement with Deere & Company, the Company’s provision (credit) for income taxes is generally recorded as if Capital Corporation and each of its subsidiaries filed separate income tax returns, with a modification for realizability of certain tax benefits. The difference between the provision (credit) for income taxes recorded by the Company and the provision (credit) for income taxes calculated on an unmodified, separate return basis was not significant for any periods presented.
The Company’s unrecognized tax benefits at July 28, 2019 were $
21
(9) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.
Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.
The fair values of financial instruments that do not approximate the carrying values were as follows (in millions of dollars):
July 28, 2019 | October 28, 2018 | July 29, 2018 |
| ||||||||||||||||
Carrying | Fair | Carrying | Fair | Carrying | Fair |
| |||||||||||||
Value | Value * | Value | Value * | Value | Value * |
| |||||||||||||
Receivables financed – net |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
Retail notes securitized – net |
| |
| |
| |
| |
| |
| | |||||||
Securitization borrowings |
| |
| |
| |
| |
| |
| | |||||||
Current maturities of long-term borrowings |
| |
| |
| |
| |
| |
| | |||||||
Long-term borrowings | | | | | | |
* Fair value measurements above were Level 3 for all Receivables and Level 2 for all borrowings.
Fair values of Receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar Receivables. The fair values of the remaining Receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings include adjustments related to fair value hedges.
22
Assets and liabilities measured at fair value as Level 2 measurements on a recurring basis were as follows (in millions of dollars):
| July 28 |
| October 28 |
| July 29 |
| ||||
2019 | 2018 | 2018 |
| |||||||
Marketable securities | ||||||||||
International debt securities | $ | | ||||||||
Receivables from John Deere | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts | | $ | | $ | | |||||
Cross-currency interest rate contracts |
| |
| |
| | ||||
Other assets | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts |
| |
| |
| | ||||
Foreign exchange contracts |
| |
| |
| | ||||
Total assets * | $ | | $ | | $ | | ||||
Other payables to John Deere | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts | $ | | $ | | $ | | ||||
Cross-currency interest rate contracts |
| | |
| | |||||
Accounts payable and accrued expenses | ||||||||||
Derivatives: | ||||||||||
Foreign exchange contracts |
| |
| |
| | ||||
Total liabilities | $ | | $ | | $ | |
* Excluded from this table were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of time deposits and money market funds.
The international debt securities mature within one year or less. At July 28, 2019, the amortized cost basis and fair value of these available-for-sale debt securities were $
Fair value, nonrecurring Level 3 measurements related to Receivables with specific allowances were not significant during any periods presented. See Note 4 for additional information.
The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:
Marketable Securities – The international debt securities were valued using quoted prices for identical assets in inactive markets.
Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency forwards and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.
Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.
(10) Derivative Instruments
It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company manages the relationship of the types and amounts of its funding sources to its Receivable and Lease portfolios in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable
23
financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to financing in currencies other than the functional currencies.
All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, or the underlying hedged transaction is no longer likely to occur, or the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.
Cash flow hedges
Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at July 28, 2019, October 28, 2018, and July 29, 2018 were $
The amount of loss recorded in OCI at July 28, 2019 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $
Fair value hedges
Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of these receive-fixed/pay-variable interest rate contracts at July 28, 2019, October 28, 2018, and July 29, 2018 were $
The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows (in millions of dollars):
Cumulative Increase (Decrease) of Fair Value | |||||||||||||
Hedging Adjustments Included in the | |||||||||||||
Carrying Amount | |||||||||||||
Carrying | Active | ||||||||||||
Amount of | Hedging | Discontinued | |||||||||||
July 28, 2019 | Hedged Item | Relationships | Relationships | Total | |||||||||
Current maturities of long-term borrowings | $ | | $ | | $ | ( | $ | ( | |||||
Long-term borrowings | | | ( | |
Derivatives not designated as hedging instruments
The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of these interest rate swaps at July 28, 2019, October 28, 2018, and July 29, 2018 were $
24
$
Fair values of derivative instruments in the consolidated balance sheet were as follows (in millions of dollars):
| July 28 |
| October 28 |
| July 29 |
| ||||
2019 | 2018 | 2018 |
| |||||||
Receivables from John Deere | ||||||||||
Designated as hedging instruments: | ||||||||||
Interest rate contracts | $ | | $ | | $ | | ||||
Not designated as hedging instruments: | ||||||||||
Interest rate contracts |
| |
| |
| | ||||
Cross-currency interest rate contracts |
| |
| |
| | ||||
Total not designated |
| |
| |
| | ||||
Other Assets | ||||||||||
Not designated as hedging instruments: | ||||||||||
Interest rate contracts |
| |
| |
| | ||||
Foreign exchange contracts |
| |
| |
| | ||||
Total not designated |
| |
| |
| | ||||
Total derivative assets | $ | | $ | | $ | | ||||
Other Payables to John Deere | ||||||||||
Designated as hedging instruments: | ||||||||||
Interest rate contracts | $ | | $ | | $ | | ||||
Not designated as hedging instruments: | ||||||||||
Interest rate contracts |
| |
| |
| | ||||
Cross-currency interest rate contracts | | |
| | ||||||
Total not designated |
| |
| |
| | ||||
Accounts Payable and Accrued Expenses | ||||||||||
Not designated as hedging instruments: | ||||||||||
Foreign exchange contracts |
| |
| |
| | ||||
Total derivative liabilities | $ | | $ | | $ | | ||||
25
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following (in millions of dollars):
Three Months Ended | Nine Months Ended |
| |||||||||||
July 28 | July 29 | July 28 | July 29 |
| |||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||
Fair Value Hedges | |||||||||||||
Interest rate contracts - Interest expense |
| $ | | $ | ( | $ | | $ | ( | ||||
Cash Flow Hedges | |||||||||||||
Recognized in OCI | |||||||||||||
Interest rate contracts - OCI (pretax) |
|
| ( |
| |
| ( |
| | ||||
Reclassified from OCI |
| ||||||||||||
Interest rate contracts - Interest expense |
|
| |
| |
| |
| | ||||
Not Designated as Hedges | |||||||||||||
Interest rate contracts - Interest expense * |
| $ | ( | $ | ( | $ | ( | $ | ( | ||||
Foreign exchange contracts - Administrative and operating expenses * |
|
| |
| |
|
| |
| | |||
Total not designated | $ | ( | $ | | $ | | $ | |
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
Included in the table above are interest expense and administrative and operating expense amounts the Company incurred on derivatives transacted with John Deere. The amounts the Company recognized on these affiliate party transactions for the three months ended July 28, 2019 and July 29, 2018 were a gain of $
Counterparty Risk and Collateral
Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparty exposure by setting limits that consider the credit rating of the unrelated external counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the unrelated external counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Each master agreement executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of default or termination.
The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted with John Deere, the Company utilizes a centralized hedging structure in which John Deere enters into a derivative transaction with an unrelated external counterparty and simultaneously enters into a derivative transaction with the Company. Except for collateral provisions, the terms of the transaction between the Company and John Deere are identical to the terms of the transaction between John Deere and its unrelated external counterparty.
Certain of the Company’s derivative agreements executed directly with the unrelated external counterparties contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. At July 28, 2019, October 28, 2018, and July 29, 2018, there were
26
The Company also has ISDA agreements with John Deere that permit the net settlement of amounts owed between counterparties in the event of early termination. In addition, the Company has a loss sharing agreement with John Deere in which it has agreed to absorb any losses and expenses John Deere incurs if an unrelated external counterparty fails to meet its obligations on a derivative transaction that John Deere entered into to manage exposures of the Company. The loss sharing agreement did not increase the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, as of July 28, 2019, October 28, 2018, and July 29, 2018.
Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities for external derivatives and those with John Deere related to netting arrangements and any collateral received or paid were as follows (in millions of dollars):
July 28, 2019 |
| |||||||||||
Derivatives: | Gross Amounts | Netting | Cash Collateral Received/Paid | Net |
| |||||||
Assets |
|
|
|
|
|
|
|
| ||||
External | $ | | $ | ( | $ | | ||||||
John Deere |
| | ( |
| | |||||||
Liabilities | ||||||||||||
External |
| |
| ( |
| | ||||||
John Deere |
| |
| ( |
| |
October 28, 2018 |
| |||||||||||
Derivatives: | Gross Amounts | Netting | Cash Collateral Received/Paid | Net |
| |||||||
Assets |
|
|
|
|
|
|
|
| ||||
External | $ | | $ | ( |
|
| $ | | ||||
John Deere |
| |
| ( |
| | ||||||
Liabilities | ||||||||||||
External |
| |
| ( |
| | ||||||
John Deere |
| |
| ( |
| |
July 29, 2018 |
|
|
|
|
|
| ||||||
Derivatives: | Gross Amounts | Netting | Cash Collateral Received/Paid | Net |
| |||||||
Assets |
|
| ||||||||||
External | $ | | $ | ( | $ | | ||||||
John Deere |
| | ( |
| | |||||||
Liabilities | ||||||||||||
External |
| |
| ( |
| | ||||||
John Deere |
| |
| ( |
| |
27
(11) Pension and Other Postretirement Benefits
The Company is a participating employer in certain Deere & Company sponsored defined benefit pension plans for employees in the U.S. and certain defined benefit pension plans outside the U.S. These pension plans provide for benefits that are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company’s employees included in the plan. The Company’s pension expense amounted to $
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Overview
Organization
The Company primarily generates revenues and cash by financing John Deere dealers’ sales and leases of new and used agriculture and turf equipment and construction and forestry equipment. In addition, the Company also provides wholesale financing to dealers of the foregoing equipment and finances retail revolving charge accounts.
Trends and Economic Conditions
Industry sales of agricultural equipment in the U.S. and Canada as well as for the European Union (EU) 28 nations are forecast to be about the same as last year. South American industry sales of tractors and combines are projected to be about the same to 5 percent higher. Asian sales are forecast to be about the same or decrease slightly. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same to 5 percent higher for 2019. John Deere’s agriculture and turf segment sales decreased 6 percent in the third quarter and increased 2 percent for the first nine months. These sales are forecast to increase about 2 percent for fiscal year 2019. Construction equipment markets reflect generally positive fundamentals and economic growth worldwide. In forestry, global industry sales are expected to be about the same to 5 percent higher. John Deere’s construction and forestry segment sales increased 1 percent in the third quarter and 11 percent for the first nine months. These sales are forecast to increase about 10 percent in 2019, with the two additional months of Wirtgen adding 4 percent to segment sales.
John Deere’s third quarter results reflect the uncertainty that continues in the agricultural sector. Concerns about export market access, near-term demand for commodities, and overall crop conditions have caused farmers to postpone major equipment purchases. General economic conditions remain positive and are contributing to strong results for the construction and forestry business. The global customer base continues to expand and John Deere is encouraged by the market’s positive response to its products and services. John Deere is assessing its cost structure through reviews of organization efficiency, a footprint assessment, and an increased focus on investments with the most opportunity for differentiation.
Net income attributable to the Company in fiscal year 2019 is projected to be approximately $490 million. Net income attributable to the Company in fiscal year 2018 of $799 million included a tax benefit related to tax reform of $342 million. Excluding the 2018 benefit from tax reform, results are expected to benefit from a higher average portfolio and favorable adjustments to the provision for income taxes, partially offset by unfavorable financing spreads, higher losses on operating lease residual values, and a higher provision for credit losses.
Items of concern include trade agreements, the uncertainty of the effectiveness of governmental actions in respect to monetary and fiscal policies, the impact of sovereign debt, eurozone and Argentine issues, capital market disruptions, changes in demand and pricing for used equipment, and geopolitical events. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the Company’s results.
29
2019 Compared with 2018
The total revenues and net income attributable to the Company were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | ||||||||||||
July 28 | July 29 | July 28 | July 29 |
| |||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||
Total revenues | $ | 741.8 | $ | 661.1 | $ | 2,105.6 | $ | 1,863.8 | |||||
Net income attributable to the Company | 144.8 | 120.2 | 350.8 | 638.8 |
Total revenues for both periods generally increased due to a higher average portfolio and higher financing rates. Prior year net income results for the third quarter and year to date included a favorable provision for income taxes associated with tax reform. Results for the current quarter and first nine months included income from a higher average portfolio and favorable discrete adjustments to the provision for income taxes, partially offset by less favorable financing spreads and higher losses on operating lease residual values.
Revenues
The finance income and lease revenues earned by the Company were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | ||||||||||||||||
July 28 | July 29 | % | July 28 | July 29 | % | ||||||||||||
2019 | 2018 | Change |
| 2019 | 2018 | Change | |||||||||||
Finance income earned from: | |||||||||||||||||
Retail notes | $ | 241.5 | $ | 193.7 | 25 | $ | 665.0 | $ | 562.6 | 18 | |||||||
Revolving charge accounts | 94.3 | 91.7 | 3 | 243.0 | 235.6 | 3 | |||||||||||
Wholesale receivables | 141.9 | 122.8 | 16 | 400.9 | 332.0 | 21 | |||||||||||
Lease revenues | 256.7 | 231.2 | 11 | 741.6 | 670.9 | 11 |
The increases in finance income earned on retail notes and wholesale receivables were primarily due to higher average financing rates and higher average portfolio balances. The increases in finance income earned on revolving charge accounts and in lease revenues were primarily due to higher average portfolio balances.
Revenues earned from John Deere totaled $196.6 million in the third quarter and $550.1 million in the first nine months of 2019, compared with $174.5 million and $476.8 million for the same periods last year. The increase was primarily due to increased compensation paid by John Deere for waived or reduced finance charges on Receivables and Leases. Revenues earned from John Deere are included in the revenue amounts discussed above and in “Other income” on the statement of consolidated income.
30
Expenses
Significant expenses incurred by the Company were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | ||||||||||||||||
July 28 | July 29 | % | July 28 | July 29 | % | ||||||||||||
2019 | 2018 | Change |
| 2019 | 2018 | Change | |||||||||||
Interest expense | $ | 256.2 | $ | 196.1 | 31 | $ | 734.7 | $ | 530.5 | 38 | |||||||
Administrative and operating expenses | 102.6 | 92.4 | 11 | 313.3 | 306.7 | 2 | |||||||||||
Provision for credit losses | 23.4 | 27.6 | (15) | 50.3 | 43.7 | 15 | |||||||||||
Depreciation of equipment on operating leases | 188.0 | 173.3 | 8 | 544.3 | 511.1 | 6 | |||||||||||
Provision (credit) for income taxes | 11.8 | 30.0 | (61) | 71.4 | (220.3) | 132 |
The increase in interest expense for the third quarter and first nine months of 2019 was primarily due to higher average borrowing rates and higher average borrowings.
The provision for credit losses for the third quarter decreased primarily due to lower net write-offs of revolving charge accounts. The provision for credit losses for the first nine months of 2019 increased primarily due to higher net write-offs of revolving charge accounts and retail notes. The annualized provision for credit losses, as a percentage of the average balance of total Receivables financed, was .29 percent in the third quarter and .21 percent in the first nine months of 2019, compared with .37 percent and .20 percent for the same periods last year. See the Company's most recently filed annual report on Form 10-K for further information regarding the Company's allowance for credit losses policies.
The depreciation of equipment on operating leases for the third quarter and first nine months of 2019 increased primarily due to higher average balances of equipment on operating leases.
The provision for income taxes decreased in the third quarter primarily due to favorable discrete tax adjustments. The higher provision for income taxes in the first nine months of 2019 was primarily related to the tax reform benefits recorded in the prior year. See Note 8 to the interim consolidated financial statements for additional information.
Ratio of Earnings to Fixed Charges
The Company’s ratio of earnings to fixed charges was 1.61 to 1 for the third quarter of 2019, compared with 1.76 to 1 for the third quarter of 2018. The Company’s ratio of earnings to fixed charges was 1.57 to 1 for the first nine months of 2019, compared with 1.78 to 1 for the first nine months of 2018. “Earnings” consist of income before income taxes, the cumulative effect of changes in accounting, and fixed charges excluding unamortized capitalized interest. “Fixed charges” consist of interest on indebtedness, amortization of debt discount and expense, interest related to uncertain tax positions, an estimated amount of rental expense that is deemed to be representative of the interest factor, and capitalized interest.
31
Receivables and Leases
Receivable and Lease (excluding wholesale) acquisition volumes were as follows (in millions of dollars):
Three Months Ended | |||||||||||
July 28 | July 29 | $ | % | ||||||||
2019 | 2018 | Change | Change | ||||||||
Retail notes: |
|
|
|
|
|
| |||||
Agriculture and turf | $ | 2,056.0 | $ | 1,981.8 | $ | 74.2 |
| 4 | |||
Construction and forestry |
| 511.6 |
| 485.6 |
| 26.0 |
| 5 | |||
Total retail notes |
| 2,567.6 |
| 2,467.4 |
| 100.2 |
| 4 | |||
Revolving charge accounts |
| 1,705.9 |
| 1,613.1 |
| 92.8 |
| 6 | |||
Financing leases |
| 182.3 |
| 157.2 |
| 25.1 |
| 16 | |||
Equipment on operating leases |
| 588.0 |
| 527.6 |
| 60.4 |
| 11 | |||
Total Receivables and Leases (excluding wholesale) | $ | 5,043.8 | $ | 4,765.3 | $ | 278.5 |
| 6 |
Nine Months Ended | |||||||||||
July 28 | July 29 | $ | % | ||||||||
2019 | 2018 | Change | Change | ||||||||
Retail notes: |
|
|
|
|
|
| |||||
Agriculture and turf | $ | 5,770.6 | $ | 5,337.2 | $ | 433.4 |
| 8 | |||
Construction and forestry |
| 1,367.3 |
| 1,363.8 |
| 3.5 |
| ||||
Total retail notes |
| 7,137.9 |
| 6,701.0 |
| 436.9 |
| 7 | |||
Revolving charge accounts |
| 5,365.4 |
| 5,124.4 |
| 241.0 |
| 5 | |||
Financing leases |
| 325.7 |
| 314.9 |
| 10.8 |
| 3 | |||
Equipment on operating leases |
| 1,589.4 |
| 1,506.7 |
| 82.7 |
| 5 | |||
Total Receivables and Leases (excluding wholesale) | $ | 14,418.4 | $ | 13,647.0 | $ | 771.4 |
| 6 | |||
Total Receivables and Leases owned were as follows (in millions of dollars):
| July 28 |
| October 28 |
| July 29 |
| ||||
2019 | 2018 | 2018 |
| |||||||
Retail notes: | ||||||||||
Agriculture and turf | $ | 15,476.3 | $ | 15,179.2 | $ | 14,588.5 | ||||
Construction and forestry |
| 3,120.3 |
| 2,931.7 |
| 2,833.5 | ||||
Total retail notes |
| 18,596.6 |
| 18,110.9 |
| 17,422.0 | ||||
Revolving charge accounts |
| 3,798.7 |
| 3,797.6 |
| 3,686.9 | ||||
Wholesale receivables |
| 10,299.5 |
| 7,967.6 |
| 9,050.3 | ||||
Financing leases |
| 716.9 |
| 770.6 |
| 728.1 | ||||
Equipment on operating leases |
| 5,323.3 |
| 5,102.5 |
| 4,861.8 | ||||
Total Receivables and Leases | $ | 38,735.0 | $ | 35,749.2 | $ | 35,749.1 |
32
Total Receivables 30 days or more past due, non-performing Receivables, and the allowance for credit losses were as follows (in millions of dollars and as a percentage of the Receivables balance):
July 28 | October 28 | July 29 | ||||||||||||||
2019 | 2018 | 2018 | ||||||||||||||
Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||
Receivables 30 days or more past due | $ | 349.0 | 1.04 | $ | 483.2 | 1.58 | $ | 463.4 | 1.50 | |||||||
Non-performing Receivables | 334.4 | 1.00 | 142.0 | .46 | 123.9 | .40 | ||||||||||
Allowance for credit losses | 110.4 | .33 | 106.7 | .35 | 115.7 | .37 |
Receivables 30 days or more past due continue to accrue finance income. The Company ceases to accrue finance income once Receivables are considered non-performing. An allowance for credit losses is recorded for the estimated uncollectible amount.
During the first quarter of 2019, the Company amended the timing in which finance income and lease revenue is generally suspended on retail notes, revolving charge accounts, and finance lease accounts from 120 days delinquent to 90 days delinquent. This change in estimate was made on a prospective basis and did not have a significant effect on the Company’s consolidated financial statements. Management’s methodology to determine the collectability of delinquent accounts was not affected by the change. See Note 4 to the interim consolidated financial statements for additional information.
The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including historical net loss experience by product category, portfolio duration, delinquency trends, economic conditions in the Company’s major markets and geographies, and credit risk quality. The Company believes its allowance is sufficient to provide for losses inherent in its existing Receivable portfolio.
Deposits withheld from dealers and merchants amounted to $138.8 million at July 28, 2019, compared with $166.0 million at October 28, 2018 and $169.2 million at July 29, 2018. These balances primarily represent the aggregate dealer retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged.
33
Write-offs and recoveries of Receivables, by product, and as an annualized percentage of average balances held during the period, were as follows (in millions of dollars):
Three Months Ended | ||||||||||
July 28, 2019 | July 29, 2018 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Write-offs: |
|
|
|
|
|
|
| |||
Retail notes: | ||||||||||
Agriculture and turf | $ | (1.6) |
| (.04) | $ | (1.4) |
| (.04) | ||
Construction and forestry |
| (5.6) |
| (.73) |
| (4.9) |
| (.71) | ||
Total retail notes |
| (7.2) |
| (.16) |
| (6.3) |
| (.15) | ||
Revolving charge accounts |
| (25.4) |
| (2.82) |
| (25.1) |
| (2.88) | ||
Wholesale receivables |
| (.1) |
|
| (.2) |
| (.01) | |||
Financing leases | (.5) | (.30) | (.8) | (.46) | ||||||
Total write-offs |
| (33.2) |
| (.41) |
| (32.4) |
| (.43) | ||
Recoveries: | ||||||||||
Retail notes: | ||||||||||
Agriculture and turf |
| 1.4 |
| .04 |
| .5 |
| .01 | ||
Construction and forestry |
| .4 |
| .05 |
| .3 |
| .04 | ||
Total retail notes |
| 1.8 |
| .04 |
| .8 |
| .02 | ||
Revolving charge accounts |
| 7.5 |
| .84 |
| 4.7 |
| .54 | ||
Wholesale receivables | .4 | .02 | .2 | .01 | ||||||
Financing leases | .1 | .06 |
| .3 |
| .17 | ||||
Total recoveries |
| 9.8 |
| .13 |
| 6.0 |
| .08 | ||
Total net write-offs | $ | (23.4) |
| (.28) | $ | (26.4) |
| (.35) |
Nine Months Ended | ||||||||||
July 28, 2019 | July 29, 2018 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Write-offs: |
|
|
|
|
|
|
| |||
Retail notes: | ||||||||||
Agriculture and turf | $ | (5.7) |
| (.05) | $ | (5.4) |
| (.05) | ||
Construction and forestry |
| (14.7) |
| (.65) |
| (10.7) |
| (.53) | ||
Total retail notes |
| (20.4) |
| (.15) |
| (16.1) |
| (.13) | ||
Revolving charge accounts |
| (50.8) |
| (2.11) |
| (44.1) |
| (1.90) | ||
Wholesale receivables |
| (.1) |
|
| (.6) |
| (.01) | |||
Financing leases | (2.1) | (.41) | (2.3) | (.45) | ||||||
Total write-offs |
| (73.4) |
| (.31) |
| (63.1) |
| (.29) | ||
Recoveries: | ||||||||||
Retail notes: | ||||||||||
Agriculture and turf |
| 4.1 |
| .04 |
| 3.9 |
| .04 | ||
Construction and forestry |
| .9 |
| .04 |
| 1.5 |
| .07 | ||
Total retail notes |
| 5.0 |
| .04 |
| 5.4 |
| .04 | ||
Revolving charge accounts |
| 17.5 |
| .73 |
| 15.3 |
| .66 | ||
Wholesale receivables | 4.0 | .06 | .1 | |||||||
Financing leases | .3 | .06 |
| .6 |
| .12 | ||||
Total recoveries |
| 26.8 |
| .11 |
| 21.4 |
| .10 | ||
Total net write-offs | $ | (46.6) |
| (.20) | $ | (41.7) |
| (.19) | ||
34
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under “Overview” and other forward-looking statements herein that relate to future events, expectations and trends involve factors that are subject to change, and risks and uncertainties that could cause actual results to differ materially.
Factors that could materially affect the Company’s operations, access to capital, expenses, and results include changes in, uncertainty surrounding and the impact of governmental trade, banking, monetary, and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs, and other areas. Actions by central banks, financial, and securities regulators may affect the costs and expenses of financing the Company and the financing rates it is able to offer. The Company’s business is affected by general economic conditions in the global markets in which the Company operates because deteriorating economic conditions and political instability can result in decreased customer confidence, lower demand for equipment, higher credit losses, and greater currency risk. The Company’s business is also affected by actions of banks, financing and leasing companies, and other lenders that compete with the Company for customers; capital market disruptions; significant changes in capital market liquidity and associated funding costs; interest rates and foreign currency exchange rates and their volatility; changes to and compliance with privacy regulations; changes in weather patterns; the political and social stability of the global markets in which the Company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; and the spread of major epidemics.
Significant changes in market liquidity conditions, changes in the Company’s credit ratings, and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the Company’s earnings and cash flows. Financial market conditions could also negatively impact customer access to capital for purchases of John Deere’s products and customer confidence and purchase decisions, borrowing and repayment practices, and the number and size of customer loan delinquencies and defaults. A debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, and Company operations and results. Security breaches, cybersecurity attacks, technology failures, and other disruptions to the Company’s information technology infrastructure also could materially affect results. The Company’s operations could be impaired by changes in the equity, bond, and other financial markets, which would negatively affect earnings.
The anticipated withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability, and economic conditions in the United Kingdom, the European Union, and elsewhere. The economic conditions and outlook could be further adversely affected by (i) the uncertainty concerning the timing and terms of the exit, (ii) new or modified trading arrangements between the United Kingdom and other countries, (iii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iv) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial, and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations, and financial position.
The liquidity and ongoing profitability of the Company depend largely on timely access to capital in order to meet future cash flow requirements, and to fund operations, costs, and purchases of John Deere’s products. If general economic conditions deteriorate or capital markets become more volatile, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact the Company’s write-offs and provision for credit losses.
35
In addition, the Company’s business is closely related to John Deere’s business. Further information, including factors that could materially affect the Company’s and John Deere’s financial results, is included in the most recent Deere & Company Form 10-K and Form 10-Q (including, but not limited to, the factors discussed in Item 1A. Risk Factors of the Form 10-K and quarterly reports on Form 10-Q) and other Deere & Company and Capital Corporation quarterly and other filings with the SEC.
Critical Accounting Policies
See the Company’s critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.
Capital Resources and Liquidity
For additional information on the Company's dependence on and relationships with Deere & Company, see the Company's most recently filed annual report on Form 10-K.
During the first nine months of 2019, the aggregate net cash provided by operating and financing activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $1,364.9 million in the first nine months of 2019. Net cash provided by financing activities totaled $2,627.5 million in the first nine months of 2019, resulting primarily from an increase in total external borrowings of $1,984.4 million and a net increase in payables to John Deere of $948.1 million, partially offset by dividends paid of $280.0 million. Net cash used by investing activities totaled $3,958.7 million in the first nine months of 2019, primarily due to an increase in net wholesale receivables of $2,362.5 million and the cost of equipment on operating leases acquired exceeding proceeds from sales of equipment on operating leases by $802.1 million and the cost of Receivables acquired (excluding wholesale) exceeding the collections of Receivables (excluding wholesale) by $668.7 million. Cash, cash equivalents, and restricted cash increased $27.4 million during the first nine months of 2019.
During the first nine months of 2018, the aggregate net cash provided by operating and financing activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $976.6 million in the first nine months of 2018. Net cash provided by financing activities totaled $2,505.2 million in the first nine months of 2018, resulting primarily from an increase in total external borrowings of $1,880.1 million and a net increase in payables to John Deere of $1,011.8 million, partially offset by dividends paid of $365.0 million. Net cash used for investing activities totaled $3,481.2 million in the first nine months of 2018, primarily due to an increase in net wholesale receivables of $2,188.8 million, the cost of equipment on operating leases acquired exceeding proceeds from sales of equipment on operating leases by $737.7 million, and the cost of Receivables acquired (excluding wholesale) exceeding the collections of Receivables (excluding wholesale) by $486.6 million. Cash, cash equivalents, and restricted cash decreased $11.0 million during the first nine months of 2018.
The Company relies on its ability to raise substantial amounts of funds to finance its Receivable and Lease portfolios. The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. The Company’s ability to meet its debt obligations is supported in a number of ways. The assets of the Company are self-liquidating in nature. A solid equity position is available to absorb unusual losses on these assets and all commercial paper is backed by unsecured, committed borrowing lines from various banks. Liquidity is also provided by the Company’s ability to securitize these assets and through the issuance of term debt. Additionally, liquidity may be provided through loans from John Deere. The Company’s commercial paper outstanding at July 28, 2019, October 28, 2018, and July 29, 2018 was $1,026.1 million, $1,987.3 million, and $2,123.6 million, respectively, while the total cash, cash equivalents, and marketable securities position was $656.0 million, $608.4 million, and $1,072.4 million, respectively. The amount of cash, cash equivalents, and marketable securities held by foreign subsidiaries was approximately $157.1 million, $108.3 million, and $118.2 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively.
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Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 5). At July 28, 2019, this facility had a total capacity, or “financing limit,” of $3,500.0 million of secured financings at any time. After a two-year revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At July 28, 2019, $1,681.0 million of short-term securitization borrowings was outstanding under the agreement.
During the first nine months of 2019, the Company issued $5,150.2 million and retired $3,332.4 million of long-term borrowings, which were primarily medium-term notes. During the first nine months of 2019, the Company also issued $3,309.9 million and retired $2,194.5 million of retail note securitization borrowings and maintained an average commercial paper balance of $2,883.9 million. At July 28, 2019, the Company’s funding profile included $1,162.5 million of commercial paper and other notes payable, $4,994.8 million of securitization borrowings, $2,294.8 million of loans from John Deere, $26,304.9 million of unsecured term debt, and $4,110.1 million of equity capital. The Company’s funding profile may be altered to reflect such factors as relative costs of funding sources, assets available for securitizations, and capital market accessibility.
Total interest-bearing indebtedness amounted to $34,757.0 million at July 28, 2019, compared with $31,391.2 million at October 28, 2018 and $31,902.0 million at July 29, 2018. Total short-term indebtedness amounted to $14,721.6 million at July 28, 2019, compared with $11,959.0 million at October 28, 2018 and $13,310.5 million at July 29, 2018. Total long-term indebtedness amounted to $20,035.4 million at July 28, 2019, compared with $19,432.2 million at October 28, 2018 and $18,591.5 million at July 29, 2018. The ratio of total interest-bearing debt, including securitization indebtedness, to stockholder’s equity was 8.5 to 1 at July 28, 2019, compared with 7.7 to 1 at October 28, 2018 and 8.1 to 1 at July 29, 2018.
Stockholder’s equity was $4,110.1 million at July 28, 2019, compared with $4,070.0 million at October 28, 2018 and $3,935.1 million at July 29, 2018. The increase in the first nine months of 2019 was primarily due to net income attributable to the Company of $350.8 million, partially offset by dividends paid of $280.0 million and an unrealized loss on derivatives of $21.3 million.
Lines of Credit
The Company has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both the Company and Deere & Company. Worldwide lines of credit totaled $7,936.4 million at July 28, 2019, $5,332.4 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, of the Company and Deere & Company were primarily considered to constitute utilization. Included in the total credit lines at July 28, 2019 was a 364-day credit facility agreement of $2,800.0 million expiring in fiscal April 2020. In addition, total credit lines included long-term credit facility agreements of $2,500.0 million expiring in April 2023 and $2,500.0 million expiring in April 2024. These credit agreements require the Company to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and its ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. All of these requirements of the credit agreements have been met during the periods included in the consolidated financial statements.
Debt Ratings
The Company's ability to obtain funding is affected by its debt ratings, which are closely related to the outlook for and the financial condition of John Deere, and the nature and availability of support facilities, such as its lines of credit and the support agreement from Deere & Company.
To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets.
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The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are the same as those for John Deere. Those ratings are as follows:
| Senior Long-Term |
| Short-Term |
| Outlook |
| |
Fitch Ratings | A | F1 | Stable | ||||
Moody’s Investors Service, Inc. |
| A2 |
| Prime-1 |
| Stable | |
Standard & Poor’s |
| A |
| A-1 |
| Stable |
Dividends
Capital Corporation declared and paid cash dividends to John Deere Financial Services, Inc. (JDFS) of $280.0 million and $365.0 million in the first nine months of 2019 and 2018, respectively. In each case, JDFS paid comparable dividends to Deere & Company.
On August 28, 2019, Capital Corporation declared a $50.0 million dividend to be paid to JDFS on September 16, 2019. JDFS, in turn, declared a $50.0 million dividend to Deere & Company, also payable on September 16, 2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See the Company’s most recent annual report filed on Form 10-K (Part II, Item 7A). There has been no material change in this information.
Item 4. Controls and Procedures.
The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Act)) were effective as of July 28, 2019, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Act. During the third quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to retail credit matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its financial statements.
Item 1A. Risk Factors.
See the Company's most recent annual report on Form 10-K (Part I, Item 1A). There has been no material change in this information. The risks described in the annual report on Form 10-K and the “Safe Harbor Statement” in this report are not the only risks faced by the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Omitted pursuant to instruction H.
Item 3. Defaults Upon Senior Securities.
Omitted pursuant to instruction H.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Certain instruments relating to long-term borrowings, constituting less than 10% of the registrant’s total assets, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the SEC.
3.1 | |
3.2 | |
31.1 | |
31.2 | |
32 | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Incorporated by reference. Copies of these exhibits are available from the Company upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JOHN DEERE CAPITAL CORPORATION | ||||
Date: | August 29, 2019 | By: | /s/ Ryan D. Campbell | |
Ryan D. Campbell | ||||
Senior Vice President and | ||||
Principal Financial Officer and Principal Accounting Officer |
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